Theme 5: Impact of TaxesLesson 1: How Taxes Influence Behavior
One to four hours
- History/Social Studies
- Family and Consumer Sciences
To help students understand how taxes may influence the way people spend and save their money
Students will be able to
- describe the purpose of the sin tax, the gasoline excise tax, and the luxury tax.
- explain how such taxes affect the behaviors and choices of taxpayers.
Legislators have three goals in mind as they prepare tax laws:
- the need to raise revenue,
- fairness to taxpayers, and
- the ability to influence taxpayers' behavior.
A sin tax is a significant tax on a product or service that is unhealthy. The tax is used to discourage the purchase and use of products that pose a risk to health, such as tobacco and alcohol.
Puritan founders of the New England colonies used the earliest sin taxes, called sumptuary taxes. High taxes were levied on certain foods, items of clothing, tobacco, and alcohol. Early governors used the tax to discourage conspicuous consumption and what was considered unsuitable behavior.
The gasoline excise tax is not meant to discourage use of gasoline. It is a user tax. People who use gasoline pay taxes on it. In turn, the government spends the tax revenues on maintaining and building roads and highways and regulating underground pollution caused by gas storage. Since 1982, funds also have been used to develop and maintain mass transportation in urban areas.
The gasoline tax was first proposed in 1914 as a federal tax but was not instituted until 1932. (State governments first implemented gasoline taxes in 1919.)
Luxury taxes tax expensive, nonessential items. The tax requires those who buy luxury goods such as luxury cars to pay more for the goods. Revenue is then redistributed to benefit all citizens through government programs. The luxury tax is a progressive tax--it takes more from the wealthy than from the poor.
The luxury tax can make certain products and services more desirable--there is a prestige in owning an item that is considered a luxury. A downside to luxury taxes is that they can be too effective. When luxury taxes become too steep, people may choose to stop purchasing a particular product.
A tax that cannot be shifted to others, such as the federal income tax.
A tax on the sale or use of specific products or transactions.
gasoline excise tax
An excise tax paid by consumers when they purchase gasoline. The tax covers the manufacture, sale, and use of gasoline.
A tax paid on expensive goods and services considered by the government to be nonessential.
A tax on goods such as tobacco and alcohol.
A tax that is paid directly by the consumer of a good, product, or service.
Distribute Info Sheet 1: Three Taxes that Influence Behavior, and discuss the main points with students.
- How do you think taxes affect people's behavior? Increased taxes on goods and services might make people less likely to purchase those goods or services. Some goods and services are necessary and the tax will make no difference.
Reinforce the concept that the process of legislating taxes is a constant balancing act between the goals of generating revenue, achieving fairness to all taxpayers, and influencing taxpayers' behavior.
Direct students to Student Lesson: How Taxes Influence Behavior. Have students complete one or more of the following activities:
Activity 1: The Cigarette Tax-Determine if the cigarette tax is high enough to discourage smoking.
Activity 2: The Gasoline Tax-Calculate the tax you'll pay for gas in four states.
Activity 3: Tax Scrambler-Tax your brain in this fun activity!
Activity 4: Tax Scrambler-Use the clues to complete an electronic word scramble.
Print Worksheet: Three Taxes that Influence Behavior and distribute it to students.
Distribute Info Sheet 2: Federal Excise Taxes, Fiscal Year 1933. Have students find the goods that were subject to excise taxes in 1933 and are still taxed today. Next, have them find items that were dropped from the list between 1933 and 2007.
Discuss with students the goals tax legislators could have achieved by taxing chewing gum during the Great Depression. Have students think about excise taxes in terms of how they influence consumers' behavior. Tell students that at that time, chewing gum would have seemed a luxury. People who could afford to buy gum probably could afford to pay the additional tax.
Have students summarize the three taxes discussed in this lesson and explain how they influence spending habits. Have students read the local paper for recent developments or changes to the taxes mentioned here.
Direct students to complete Assessment: How Taxes Influence Behavior.
Print Assessment: How Taxes Influence Behavior and have students complete it on paper.
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